George Osborne considers Tory plans for emergency cuts cabinet

The following correction was printed in the Guardian's Corrections and clarifications column, Friday 26 June 2009

In the article below we mentioned an article by David Halpern, a former adviser to Tony Blair, "in the magazine Progress". That should have been Prospect. This has been corrected.

George Osborne, the shadow chancellor, is considering plans to stage a two-day emergency cabinet session soon after the Tories gain power, at which cabinet ministers would be collectively bound into large-scale spending cuts, according to shadow cabinet sources.

The idea is modelled on some of the cabinet discussions held by the Labour government in the 1970s, and would bind high-spending department heads into an agreed decision on how spending will be brought under control.

The Conservatives have said they may need to cut public spending by as much 10% in the three years from 2011, excluding health and international development, to bring public debt under control.

Osborne is also being advised that it would be wise to "sequence" decisions so the spending cuts happen in the first year of a new parliament, partly because of fears that higher inflation will force a rise in interest rates. That will increase the cost of public sector debt to the taxpayer.

Kenneth Clarke, the shadow business secretary, has been strongly suggesting the shadow cabinet take unpopular decisions in its first two years of power.

Osborne has looked at the cabinet merely agreeing the overall spending totals, or asking them to agree departmental totals. It is now more likely he will require cabinet ministers in big-spending departments to attend a "star chamber" at which they would be individually required to justify their departmental budgets. Their proposals would be scrutinised by "non- spending" big beasts, such as William Hague, the foreign secretary, and Clarke. If ministers felt they had been unreasonably treated, they could appeal to full cabinet, something that would be frowned upon.

But some shadow cabinet members are arguing that an emergency collective cabinet decision might be the most effective approach: it would allow the tensions between the big-spending ministries, such as defence and schools, to be aired in front of the cabinet, binding everyone in to whatever decisions were taken.

It is also being argued by shadow cabinet ministers that this collective session would need to be held before cabinet ministers became totally bound into their departmental interests.

The Treasury team are hoping to avoid a full emergency budget immediately after an election, but will be guided by the markets, and if necessary hold one within weeks should they come into office.

An office of budget responsibility would make fiscal projections, replacing the current in-house Treasury forecasts, and recommend fiscal tightening if necessary.

The level of thinking inside the shadow cabinet about how to address public spending reveals the degree to which the Conservatives are intellectually convinced that big spending cuts will be necessary to constrain debt that has now been described as too large by both the IMF and the European commission.

There are signs that senior Labour ministers are also recalibrating how they will approach the issue of public spending in the next few months, accepting that the government cannot simply argue that the choice at the next election is one between Labour investment and Tory cuts.

Yesterday, the governor of the Bank of England heaped more pressure on Labour, rejecting Alistair Darling's budget forecasts, laid out in April, as too unambitious, and urging the Treasury to act more urgently to bring borrowing down. "We are confronted with a situation where the scale of deficits is truly extraordinary. This reflects the scale of the global downturn, but it also reflects the fact that we came into this crisis with fiscal policy on a path that wasn't sustainable and a correction was needed," he said.

Gordon Brown was forced to concede yesterday that the government is planning to cut capital spending from £44bn in 2009-10 to £26bn by 2013.

The prime minister defended the reduction, saying it had been caused by the need to bring forward planned capital spending this year to counter the recession.

In a sign that Labour is looking at tougher spending controls, Liam Byrne, the chief secretary to the Treasury, has asked every Whitehall departments to appoint a value-for-money minister by the end of the month.

Cabinet ministers are arguing in private that the better position for the government is not to rule out spending cuts, but to hold fire until the public finances position becomes clearer later in the year.

A former adviser to Tony Blair, however, has claimed that billions of pounds of spending can be slashed from Whitehall budgets through a mixture of innovation and cutting back on waste.

David Halpern, chief analyst in Blair's strategy unit between 2001 and 2007, suggests in the magazine Prospect that the "structural gap" in UK finances, after spending on the recession, is likely to be £90bn a year. He argues that the government own's figures "now imply that reducing this gap will have to come mainly from cuts, not tax increases".

He described the failure of Whitehall to cut spending on failed schemes as a quiet scandal of public policy, adding ministers "should dust off, swallow hard and act" on the numerous unpublished proposals for spending efficiences identified under the Blair government, but never implemented. He writes : "One hard lesson from history is that reviews focusing on efficiency gains don't deliver what's needed when your budget deficit is heading towards 10%.

"Billions of public spending can be saved, for instance, if services for those with chronic conditions like diabetes are redesigned around self-care. Similarly, some big welfare programmes have huge deadweight costs: funnelling money to get people to do things they would have done anyway, especially among the more affluent."

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